What Disqualifies You From Filing Bankruptcies as a Business?

Filing for bankruptcy is a serious decision that can provide much-needed relief for businesses struggling with overwhelming debt. However, only some businesses automatically qualify for this legal process. Various factors determine whether a business can successfully file for bankruptcy and obtain a discharge of debts. Understanding what disqualifies you from filing bankruptcies is crucial for any business considering bankruptcy to solve its financial woes. By understanding these potential pitfalls, you can better prepare your business for bankruptcy and increase your chances of success.

Bankruptcy Means Test

If your business is a sole proprietorship, you must pass the bankruptcy means test to qualify for Chapter 7 bankruptcy. The means test looks at your income and expenses to determine if you have sufficient disposable income to repay at least a portion of your debts. If your income exceeds the median income for a family of your size in your state, you must complete the second part of the means test calculation. This involves deducting allowed monthly expenses from your income to see how much disposable income remains to pay creditors. Failing the means test disqualifies you from Chapter 7, but you may still qualify for bankruptcy under the Chapter 13 repayment plan.

Previous Bankruptcy Filings

Filing bankruptcy too frequently may prevent your business from obtaining another bankruptcy discharge. If your business already received a Chapter 7 discharge in a case filed within the past eight years, you cannot file another Chapter 7 case. If the previous discharge was in a Chapter 13 case, there’s no mandatory waiting period unless you failed to pay 70 percent of your debt, in which case you have to wait six years to file Chapter 7. When filing Chapter 13, you cannot file if you obtained a Chapter 7 discharge in a case filed within four years or a prior Chapter 13 discharge within two years. Attempting to file bankruptcy again too soon will result in your case being dismissed.

Dismissal of a Prior Case

Having a previous bankruptcy case dismissed by the court within the past 180 days will likely prevent your business from filing another case. Common reasons for dismissal include failing to obey court orders, not appearing at the Meeting of Creditors, not making required payments, or voluntarily requesting dismissal after a creditor filed a motion for relief from the automatic stay. The court can impose a 180-day prohibition on refiling if it finds your business willfully failed to abide by court orders or appear in proper prosecution of the case. This time bar gives creditors relief and prevents bad faith repeat filings.

Fraudulent Actions

Bankruptcy fraud will not only get your case dismissed but can disqualify you from filing bankruptcy again and subject you to criminal prosecution. Concealing assets, lying on your bankruptcy paperwork, filing false claims, bribing court officials, intentionally running up debt before filing, or otherwise trying to mislead the court constitutes fraud. The U.S. Trustee’s Office actively pursues bankruptcy fraud and can file civil or criminal charges. Getting caught committing fraud will likely disqualify your business from obtaining bankruptcy relief. Always be fully truthful and transparent in your dealings with the bankruptcy court.

Ineligible Legal Structure

Specific business legal structures face restrictions when filing certain types of bankruptcy. For example, stockbrokers and commodity brokers cannot file Chapter 11, only Chapter 7. Insurance companies and banks cannot file Chapter 7 or Chapter 11. In contrast, sole proprietorships cannot file Chapter 11 and must file a personal bankruptcy under Chapter 7 or 13 instead. Make sure your type of business entity qualifies for the chapter of bankruptcy you intend to pursue.

Inability to Complete Required Paperwork

Filing bankruptcy involves significant paperwork and documentation. Being unable or unwilling to thoroughly and accurately complete the required bankruptcy petition, schedules, statements, and associated documents can prevent your business from filing bankruptcy. Leaving out information, lacking necessary records, or submitting incomplete paperwork will derail your case. Work with an experienced bankruptcy attorney to ensure you properly handle all the requisite paperwork.

All of these issues represent significant problems that can disqualify a business from filing bankruptcy. If you are considering bankruptcy for your business, consult a knowledgeable bankruptcy lawyer to evaluate your situation and determine the best path forward. The attorneys at Bradford Law Offices are ready to help. Contact us today or call (919) 758-8879 for a free consultation to discuss your business debt relief options. We will guide you through the process and work diligently to get your business the fresh start it needs.